Banking System and Consequences

Comparison between Conventional
&
Islamic Banking and The Challenges for Islamic Banking Products
INTRODUCTION
Bank is an institution that deals in money. In general, it receives deposits and advance
loans. Islamic banks differ from other banks by virtue of their rejection of the
conventional banking practices of charging interest on loans and paying interest on
deposits.
Like other financial intermediaries, however, Islamic banks make profits by putting the
savings of investors at the services of borrowers. Instead of charging fixed rates to
borrowers, they share in the profits and losses of the borrowers’ business transactions,
and divide their share of the profit with investors who have deposited funds in the bank.
Rates of return, calculated ex post, are variable, depending on a whole complex of
business transactions rather than on a predetermined fixed rate that would be equivalent
to interest. Conventional Banking is differing because it does not share profit and loss
with consumer; or neither bears the liabilities, just earned profit from borrowers in form
of interest. Interest is fixed rate of return charged on borrowed amount. However, for
more than half a century the debate of Muslim jurists concentrated only on the
prohibition of Riba and the permissibility of profit via trade, which is allowed according
to The Quran and the Sunnah.
Islamic Banking Department was established on 15th September, 2003 and has been
entrusted with the huge task of promoting & developing the Shariah Compliant Islamic
Banking as a parallel and compatible banking system in the country.
Islamic Banking is one of the emerging field in global financial market, having
tremendous potential and growing at a very fast pace all around the world. Al-
Hamdulillah, the progress of Islamic Banking in Pakistan has also been commendable
during the last three years. Currently there are six licensed full fledged Islamic Banks and
twelve conventional banks with standalone Islamic Banking Branches with the total
branch network of over 140 branches operating in twenty three cities of all the four
provinces in the country as of 01.01.2007 and applications for few more players are under
consideration. Islamic Banking is a high priority area for State Bank of Pakistan.
Research Report Page 1 of 20

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Steps are being taken to make Islamic banking industry in Pakistan robust enough to
offer a viable alternative to conventional banking, should the market decide that Pakistan
should have an exclusively Islamic banking system in the country.
State Bank of Pakistan wants to develop a progressive and sound Islamic banking system
that is in line and compatible with the global financial sector, providing innovative
Shariah compliant products and services so as to achieve equitable economic growth.
One of the biggest challenges being faced by this growing industry is the dearth of
professional Islamic Bankers and capacity building in this regard is one of the top most
priorities for the promotion of Islamic Banking. In order to play our regulatory and
supervisory role more efficiently we are working on the areas like Risk Management,
Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc.

regarding Islamic Banking
Currently the Islamic Banking Department (IBD) consists of following four divisions:
1. Policy Division
2. Shariah Compliance Division
3. Business Support Division
4. Shariah Board Secretariat

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DIFFERENCESBETWEEN
ISLAMIC&CONVENTIONAL
BANKINGINSTITUTIONS
Both Banking systems are different from their ideology, their operational activity and
from purpose. Conventional Banks are concerned with elimination of risk where as
Islamic Banks can not avoid risk. Another major difference between Conventional and
Islamic banking is Conventional bank do not take the liabilities only get the benefit in
form of interest and leave all the liabilities with the consumers. For Example;
When Conventional Bank advances the loan to consumers for any

purpose they charge fixed interest on such loan. It does not concerned
with Profit or Loss of client, just concerned with getting interest out of
its investment. Either client did Loss or Profit he has
to pay interest to the conventional banks.
In comparison to Conventional Banking, Islamic Banks bear the liabilities. For Example;
Islamic Banks lend money to consumers for the business

It become the Partner of consumer and shares profit and loss with
him and bear the liabilities according to their shares.
Other difference between Islamic and conventional banking is Islamic teaching which
says that money itself has no intrinsic value, and forbids people from profiting by lending
it, without accepting a level of risk – in other words, interest (known as "Riba") cannot be
charged.
The shareholders and depositors should all share the risks and the rewards of financing
business ventures. This is unlike the interest-based commercial banking system, where all
the pressure is on the borrower: to pay back his loan, with the agreed interest, regardless
of the success or failure of his venture.

&
Islamic banking helps to contribute towards a more equitable distribution of income and
wealth and increased equity participation in the economy. There has been little study as
yet on how Islamic financial institutions differ in practice from conventional banks.
Basically differ in liquidity, leverage, credit risk, profitability and efficiency. Its principal
conclusions included the following:
• Islamic financial institutions relied more heavily on their equity than conventional
banks.
• Islamic financial institutions faced more difficulties in attracting deposits than

interest-based banks.
• Islamic financial institutions had higher cash/deposit ratios than conventional

banks.
• Islamic financial institutions tended to channel their funds into direct investment
(using musharakah and mudarabah products), rather than personal loans.
• Within the sample studied, there were no significant differences in profitability

and efficiency between Islamic financial institutions and conventional banks.
• Islamic financial institutions and conventional banks offered their depositors

similar returns.
• Islamic banking is based on profit and rent where as Conventional banks are
based on interest.
• Islamic banking deals in asset where as Conventional banks deal in money or

papers.

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• Islamic banking actively participates in trade and production through Trade,

Leasing called Ijara and joint venture where as Conventional banks does not
involve itself in trade and business only advances money regarding these
purposes.
ISLAMICBANKING
The best-known feature of Islamic banking is the prohibition on interest, known as
"Riba". It encourages the notion of higher risks and higher returns, the objective is that
high-risk investments provide a stimulus to the economy and encourage entrepreneurs to
maximize their efforts. Islam encourages investments in order that the community may
benefit. Islamic banking represents a radical departure from conventional banking, and
from the viewpoint of corporate governance, it embodies a number of interesting features
since equity participation, risk and profit-and-loss sharing arrangements from the basis of
Islamic financing.
Islamic bank cannot charge any fixed return in advance, but rather participates in the
yield resulting from the use of funds. In addition, Islamic bank is subject to an additional
layer of governance since the suitability of its investment and financing must be in strict
conformity with Islamic law and the expectations of the Muslim community. For this
purpose, Islamic banks employ an individual Shariah Advisor and/or Board.
PRINCIPLESOFISLAMICBANKING
An Islamic bank is based on the Islamic faith and must stay within the limits of Islamic
Law or the shariah in all of its actions and deeds. The original meaning of the Arabic
word shariah was 'the way to the source of life' and it is now used to refer to legal system
in keeping with the code of behavior called for by the Holly Quran.

&
Four rules govern investment behavior in islamic banking:
a. The absence of interest-based (riba) transactions.
b. The avoidance of economic activities involving speculation (gharar).
c. The introduction of an Islamic tax, zakat.
d. The discouragement of the production of goods and services which contradict the
value pattern of Islamic (haram).
In the following part-I explain these four elements give Islamic banking its distinctive
religious identity.
RIBA(INTEREST)
Perhaps the most far reaching of these is the prohibition of interest (riba). The payment of
riba and the taking as occurs in a conventional banking system is explicitly prohibited by
the Holy Quran, and thus investors must be compensated by other means. Technically,
riba refers to the addition in the amount of the principal of a loan according to the time
for which it is loaned and the amount of the loan. While earlier there was a debate as to
whether riba relates to interest or usury, there now appears to be consensus of opinion
among Islamic scholars that the term extends to all forms of interest.
CLASSIFICATIONOFRIBA
1. The first and primary type is called Riba An Nasiyah or Riba Al Jahiliya.
2. The second type is called Riba Al Fadl, Riba An Naqd or Riba Al Bai.
GHARAR
Another feature condemned by Islamic is economic transactions involving elements of
speculation, gharar. Buying goods or shares at low and selling them for higher price in
the future is considered to be illicit. Similarly an immediate sale in order to a void a loss
in the future is condemned.

&
The reason is that speculators generate their private gains at the expense of society at
large.
ZAKAT
A mechanism for the redistribution of income and wealth is inherent is Islam, so that
every Muslim is guaranteed a fair standard of living, nisab. An Islamic tax, Zakat (a term
derived from the Arabic zaka, meaning "pure") is the most important instrument for the
redistribution of wealth. This tax is a compulsory levy, one of the five basic tenets of
Islam and the generally accepted amount of the zakat is one fortieth (2.5) percent of
Muslim's annual income in cash or kind from all forms of assessed wealth exceeding
nisab.
Every Islamic bank has to establish a zakat fund for collecting the tax and distributing it
exclusively to the poor directly or through other religious institutions. This tax is imposed
on the initial capital of the bank, on the reserves, and on the profits.
HARAM
A strict code of ethical investment operates. Hence it is forbidden for Islamic banks to
finance activities or items forbidden in Islam, haram, such as trade of alcoholic beverage
and pork meat.
Furthermore, as the fulfillment or materials needs assures a religious freedom for

Muslims, Islamic banks are required to give priority to the production of essential goods
which satisfy the needs of the majority of the Muslim community, while the production
and marketing of luxury activities, “israf wa traf is considered” as unacceptable from a
religious viewpoint.
In order to ensure that the practices and activities of Islamic banks do not contradict the
Islamic ethical standards, Islamic banks are expected to establish a Shariah Supervisory
Board, consisting of Muslim jurisprudence, who acts as advisers to the banks.

&
CURRENTPRACTICES
INISLAMICBANKING
Generally speaking, all interest-free banks agree on the basic principles. However,
individual banks differ in their application. These differences are due to several reasons
including the laws of the country, objectives of the different banks, individual bank’s
circumstances and experiences, the need to interact with other interest-based banks, etc.
In the following paragraphs, we will describe the salient features common to all banks.
DEPOSITACCOUNTS
All the Islamic banks have three kinds of deposit accounts:
• Current account
• Savings account
• Investment account.
CURRENTACCOUNTS
Current or demand deposit accounts are virtually the same as in all conventional banks.
Deposit is guaranteed. Current accounts are based on the principle of al-wadiah, whereby
the depositors are guaranteed repayment of their funds. At the same time, the depositor
does not receive remuneration for depositing funds in a current account, because the
guaranteed funds will not be used for PLS ventures. Rather, the funds accumulating in
these accounts can only be used to balance the liquidity needs of the bank and for short-
term transactions on the bank's responsibility.
SAVINGSACCOUNTS
Savings deposit accounts operate in different ways. In some banks, the depositors allow
the banks to use their money but they obtain a guarantee of getting the full amount back
from the bank. Banks adopt several methods of inducing their clients to deposit with
them, but no profit is promised.
In others, savings accounts are treated as investment accounts but with less stringent
conditions as to withdrawals and minimum balance. Capital is not guaranteed but the
banks take care to invest money from such accounts in relatively risk-free short-term
projects.

&
As such lower profit rates are expected and that too only on a portion of the average
minimum balance on the ground that a high level of reserves needs to be kept at all times
to meet withdrawal demands.
INVESTMENTACCOUNT
Investment deposits are accepted for a fixed or unlimited period of time and the investors
agree in advance to share the profit (or loss) in a given proportion with the bank. Capital
is not guaranteed.
SALAM
This mode of financing can be used by the modern banks and financial institutions
especially to finance the agricultural sector. In Salam, the seller undertakes to supply
specific goods to the buyer at a future date in exchange of an advanced price fully paid at
spot. The price is in cash but the supply of purchased goods is deferred.
PURPOSEOFUSE
• To meet the need of small farmers who need money to grow their crops and
to feed their family up to the time of harvest. When Allah declared Riba
haram, the farmers could not take usurious loans. Therefore Holy Prophet
allowed them to sell their agricultural products in advance.
• To meet the need of traders for import and export business. Under Salam, it is
allowed for them that they sell the goods in advance so that after receiving their
cash price, they can easily undertake the aforesaid business. Salam is beneficial to
the seller because he received the price in advance and it was beneficial to the
buyer also because normally the price in Salam is lower than the price in spot
sales.
ISTISNA
Istisna' is a sale transaction where a commodity is transacted before it comes into
existence. It is an order to a manufacturer to manufacture a specific commodity for the
purchaser. The manufacturer uses his own material to manufacture the required goods.
In Istisna', price must be fixed with consent of all parties involved. All other necessary
specifications of the commodity must also be fully settled.

&
ISTISNA' ASAMODEOFFINANCING
Istisna' may be used to provide financing for house financing. If the client owns a land
and seeks financing for the construction of a house, the financier may undertake to
construct the house on the basis of an Istisna'.
USESOFISTISNA
• House financing
• Financing of plant or factory or building.
• Booking of apartments
• Construction of buildings and plants.
WHATISSHARIAHANDITSPURPOSE?
Islamic Shariah is the set of rules & regulations which are to be followed by Islamic
Banks. State Bank of Pakistan has implemented Shariah Rules to guide all the Islamic
banks on how to perform their day to day transactions.
CONVENTIONALBANKING
Conventional Banking System is existed in the whole world, and it has historic past
record. In Pakistan, we have seen sharp growth in Banking Industry. Now Banks are
playing very important role in our economic growth. The robust profitability of banking
system has witnessed further improvement in almost all the key financial performance
and soundness indicators. The growth trends in all the key components, to somewhat,
continued to maintain the recent years’ pace, as a result, total assets surpassed Rs4 trillion
level and pre-tax profit set another milestone by crossing Rs100 billion mark. This has
placed Pakistan among the top half in a group of 44 emerging economies.
Pakistani Banking System has been ranked among the top ten. Profitability of the banking
system kept its momentum largely on the back of persistent growth in high yield earning
assets and expanded business volumes. During the year under review, pre-tax and after-
tax profit of the banking system raised to Rs123.6 billion and Rs84.1 billion which has
shown 23% growth this years respectively. Resultantly, all the key profitability indicators
kept on healthy trends.

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In the past, most banks concentrated on investment financing i.e. extending loans to the
manufacturing sector. Today however, the trends have changed. Banks now see great
growth and potential in consumer financing. Thus they are slowly moving away from the
financing of long term investment loans and are concentrating more on short term
consumer financing. With the increase in the middle class segment there has been an
increase in the demand for consumer products. As the common man becomes more
aware, he does not want to be left behind. Be it getting married, buying a new car,
renovating his home, or getting his children educated, he is seeking to upgrade his life.
As everyone is looking for a better standard of living, banks want to cash in on this
opportunity. They see a huge market for consumer financing. They believe it will
eventually attract the masses. As a result, a great deal of competition has arisen.
Everyone wants to be a part of this; every bank wants its share.
CONSUMERBANKINGINDUSTRY
The Banking Industry caters to two major clients, i.e. Corporate and Consumer. Banks
cater to the needs of various companies, multi nationals and conglomerates by providing
services that meet the corporate demands. The Consumer Banking Industry mainly caters
to the common man and individual customer accounts.
In the past, high yielding government securities and trading in foreign exchange
generated 60-70% of the revenue for most banks. However after September 11, 2001,
Pakistan received large amounts of foreign aid and remittances from overseas citizens.
This reduced the governments borrowing needs and therefore there was a decline in the
issuance of government securities.
Although this was good news for the central bank and the economy on the whole, it left a
diminishing effect on the banking sector revenues. In its report the central bank urged
banks to find new ways to make profits.
“The banking sector is left with no option but to innovate and

concentrate on non fund based income and enterprise into new avenues
of investment.”
Therefore to remain profitable, the banks of Pakistan have been progressing into retail
banking, offering loans to buy vehicles, houses and electronic goods. They are focusing
on the day-to-day consumers rather than going for huge investment loans. Foreign, local
and private banks, by investing in new technology and human resources are competing
heavily for top-tier clients, who are also moving into consumer banking products and
facilities like credit cards, auto and home financing, ATM / Debit cards, online e-
statements and many others.

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THEFEATURESOFA
CONVENTIONALBANK
The conventional banking, which is interest based, performs the following major
activities:
1. Deposit creation
2. Financing (Refer to section IV)
3. Agency services
4. Issuing LGs
5. Advisory services
6. Other related services
FINANCINGPRODUCTS
There are two sorts of financing products:
• Fund Based Facilities:
“Banks Funds involve”

• Non-Fund Facilities:
“Banks Funds are not involved”
In these finances only bank’s name is used. Non-fund based finances convert into fund
based, if customer falls to perform the actions on its part. These do not require funds;
cash in these finances only bank’s name is used. Following finances are non-fund based:
 Letter of Credit (LC)

 Guarantees

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FUNDBASEDFINANCES
Those finances in which bank advances funds/ cash to the customers or these are placed
on customer’s disposal are called fund based finances. Following finances are fund
based:
 Running Finance
 Demand Finance
 Cash Finance
 Payment against documents
 Finance against imported merchandise
 Finance against trust receipts
 Export Finance (Export Re-Finance, Finance against Foreign Bills)
 Foreign Bills Purchased(FBP)
 Etc.
DOCUMENTSREQUIRED
(INITIALLY)
 Application for Finance

 Borrowers Basic Fact Sheet
 Financial Statements (Both P&L Account and Balance Sheet); if applicable.
 Resolution to borrow; if applicable
 Memorandum of Association & Articles of Association; if applicable.
 Partnership Deed (registered); if applicable.
Remaining documents required are explained with each type of facility.

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NON-FUNDEDFINANCING
PRODUCTS
LETTEROFCREDIT(LC)
Letter of credit is a non-fund based facility in nature and it creates contingent liability of
the bank. Exporter after shipping goods dispatches Bill of lading together with other
necessary and required documents with other necessary and required documents. Bank
scrutinized these documents after receiving these documents inform the importer and
requires the immediate release after since the LC is irrevocable, so this facility does not
have a separate limit and not mentioned in the sanction advice.
A letter of credit (hereafter abbreviated as L/C) is one of the most widely used models of
setting trade debts on an international level. Also, it is a convenient important method of
obtaining short-term financial accommodation from banks by customers.
It is within Letter of Credit (LC), also enters into an agreement that he will at the first
instances sell these documents to the bank and will buy them back.
TENUREOFTHELIMIT
This facility is approved for a period of one year but each LC has its own expiry, which is
mentioned by the importer himself at the time, he applies for the opening of LC.
BROADCLASSIFICATION
Broadly classified, LC may be bi-furcated as under:

1. Sight letters of credit (L/C sight)
2. Usance Letters of credits (L/C DA).
In case of L/C sight the draft at sight and the relevant documents are held by the security,
until the same are retired. Regarding L/C D.A., the draft drawn there under, s is for tenure
stipulated in the LC, payable by the customers on due date.

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BANKGUARANTEE
BROADCLASSIFICATION
Bank guarantees may be broadly classified under the following heads:

• Performance Guarantees
• Bid Bonds
• Shipping Guarantees
• Guarantees for Advance payments/ Mobilization Guarantees
• Security Deposit Guarantees
• Guarantees for payment of dues / Court Guarantees.
PERFORMANCEGUARANTEES
These are generally requested by customers, guaranteeing completion of work or

supplies, as per terms of contract and/ or mutual agreement. The guarantees are not for
projects which are in anyway uncertain/ speculative.
The contractive is well experienced in his line of work, having executed similar contracts
satisfactorily in the past.
BIDBONDS
The bank is often requested by its customers to issues Bid Bonds in lieu of deposit of
earnest money against bids for tenders.
SHIPPINGGUARANTEES
There are instances where the importer needs to obtain delivery of goods without
production of the relevant Bill of Lading. In such cases the Bank is requested by the
customers (imported) to issue a shipping Guarantee in Favor of the concerned shipping
company.

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ESSENCEOFTHEREPORT:
He stated that overall growth is seen in Banking Industry, this industry is function as
backbone for economic growth in any country, this upsurge in Banking industry crop up
after 9/11 disaster in America, when we have seen flow of money across border to our
country in terms of remittances, and Foreign Direct Investments (FDI). Another reason
behind growth of Banking Industry is increase in Consumer Banking. Enormous growth
in deposits, increased in equity of banks, and increase in interest earning of Banks with
21% in last year.
Where as the banking system has been performing well for quite a few years and has
been reaping the benefits of increased financial soundness, improved resilience, enhanced
competition, increased efficiencies, growing penetration and hence widening the
outreach, it has, nevertheless, become imperative that it can sustain these gains and also
build on. The robust profitability in Banking Industry is expected in coming years.
Islamic banking growth was recorded 65% which increased its share in Pakistani market
from 2% to 2.9%. Therefore there are lots of opportunities for Islamic Banks to increase
its share in Pakistani market by expanding branch network, product innovation, and
create awareness among people about Islamic products. In future, Pakistan will become
hub for Islamic financial market.
Islamic bank has benefit over conventional banks but consumer preferences demanded
equally competitiveness from these banks, it is important to achieve sustainability.
Islamic banking is just started five years ago, in the beginning there is possibility of error
but it is try to assured by us to avoid Riba, gharar and jhahala in Islamic Financing
product. To assure Shariah standard in Islamic Banking Product, State bank of Pakistan
has taken following measures:
There are few things which is not correct according to Shariah but practice by Islamic
banks for example, Late fee is charged in Islamic banks as conventional banks charged
but difference is in Conventional banks its part of income or profit where as Islamic
banks do not include such late fee in their income or profit, it is deposited in separate
charity account. Islam do not justify the act done by forcefully or without one’s will,
therefore charging late fee is not permissible according to Shariah but it is taken by client
and deposited in charity, this is done by bank to encourage him avoiding delay in
installment. This late fee matter is agreed by client when signing contract with Islamic
banks. This is permissible by Fatwa of Shariah advisors.

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Conventional banks are more competitive because of their experienced in banking

operations, availability of broad range of products, more avenues of investment, no
limitation in acquiring deposits where as in comparison, Islamic banking product cost are
bit higher, product range is limited, there are not much avenues of investment which in
turn create excess of liquidity. Islamic banks can not invest in treasury bills of
Government but now they can invest their excess of liquidity in Sukook Bond which is
designed on the concept of diminishing musharaka.
EXACTFINDINGS
On the basis of my research report, I have found that Islamic Banks have bright future,
their market share is increasing and will enhance in future but still they can not phase out
Conventional Banks.
On the basis of gathered information I have found that Islamic Bank follow Shariah
standard and proper auditing is done by them, and as cross checked State Bank of
Pakistan done their audit. Islamic Product can not be introduced by Islamic Banks
without consent of Shariah advisor.
Through research I have found, Islamic Banking and its Product is sustainable and getting
acceptability in people. Islamic banks share in Pakistani market will definitely improved
but they can't phase out Conventional Banking.
On the basis of my research, I have found that Islamic Banks are offering all solution
except Letter of Credit, they found alternative of treasury which is Sukook Bond, Islamic
Credit card is also launched by Standard Chartered Bank of Pakistan. Almost every
product is offering except one or two but procedure is complex and it will take time to
established market. Islamic banks also has Limitation they can not trade with them who
involved in business not permitted in Shariah therefore its not possible for Islamic Banks
to phase out Conventional banks and it can not facilitate every person needs..

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CONCLUSION
Conventional banks are more competitive because of their experienced in banking
operations, availability of broad range of products, more avenues of investment, no
limitation in acquiring deposits where as in comparison, Islamic banking product cost are
bit higher, product range is limited, there are not much avenues of investment which in
turn create excess of liquidity. Islamic banks can not invest in treasury bills of
Government but now they can invest their excess of liquidity in Sukook Bond which is
designed on the concept of diminishing musharaka.
Few key drivers for enhancing efficiency and competitiveness of Islamic Finance
include:
(i) Financial engineering and innovation.
(ii) Standard governance and prudential regulation.
(iii) Flexible and practical application and enforcement of Shariah
principles and injunctions and its acceptability by public.
(iv) Expanded Branch Network.
(v) Enhance Competitiveness in Rates, Product and Services.
(vi) Development and adoption of simple and standard and cost effective
legal frameworks for contracts associated with the new and hybrid
products for globally.
(vii) Islamic Banks not in specific country working anywhere has to follow
same standard for similar products.
(viii) Strong promotion is required.
Irrespective of religious appeal and affiliations, consumers would be eventually attracted

to Islamic Banking if it positions itself to offer an efficient and competitive alternate
avenue of financial intermediation which caters to all segments of population and
economy and services retail and personal banking and project finance. This can happen
only if key messages and principles of Islamic Banking are flexibly, constructively and
innovatively interpreted, its conceptual framework further developed and translated
effectively into practical applications.

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In spite of the growth potential in Islamic banking, there are several challenges which are
confronting by Islamic Financial Institutions and conventional banks which are doing
Islamic Banking.
• Shortage of experts in Islamic banking: The supply of trained or experienced

bankers has lagged behind the expansion of Islamic banking. The training needs
affect not only Arab domestic banks, both Islamic and non-Islamic, but foreign
banks as well.
• Another issue is acquiring deposits; Islamic banks can not accept a deposit of
one’s whose earning is declared Haram in Islam or earned from businesses which
are involved in sale of products, injurious to health for example Tobacco
Company.
• Potential conflicts with central banks: Islamic banks have been established as
separate legal entities; therefore, their relationships with central banks and/or
other commercial banks are uncertain. Problems may be further aggravated when
an Islamic bank is established in a non-Muslim nation, and is subject to that
nation’s rules and requirements.
• Potential conflict between domestic banks, foreign banks, and Islamic banks: It
appears that domestic banks and foreign banks will experience continuing
difficulty in adopting Islamic banking practices until they can become more
confident of the results of investing ventures.
Given that necessity is the mother of all inventions, it is perhaps a good thing that Islamic
bankers face a wide array of problems that they must surmount to guarantee the
industry’s future. Some of these are tangible and relate primarily to financial engineering
and an inability to copy conventional products due to Shariah laws. Other problems relate
to varying interpretations of Shariah laws, which lead to the inability of one Islamic bank
to copy another Islamic Bank’s products.

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The most basic difference between Conventional and Islamic Banking are given as
below:
Islamic Banking Conventional Banking
Riba Free Earned Interest
Asset base transaction Deal in Money and Documentation
Islamic banking is based on profit and rent Conventional banks are based on interest.
Share profit and loss, bear risk with
Concerned with elimination of Risk.
customers.
Bear liability Do not bear liability
REFERENCES
1. “Islamic Banking of Pakistan” had studied from
http://www.meezan bank.com/
2. “Pakistan Banks’ Association” retrieved from the World Wide Web from
http://www.pakistanbanks.org/
3. “Pakistan Institute of Development Economics” retrieved from the World Wide

Web from
http://www.pide.org.pk/
4. “Muslim Commercial Bank, Pakistan” retrieved from the World

Wide Web from http://www.mcb.com.pk/
5. Handbook of Islamic Banking, 1977-86. Published in Arabic by the International

Association of Islamic Banks, 6 Vols., Cairo.
6. Janahi, A. L., 1995. Islamic Banking, Concept, Practice, and Future 2nd edition.
Manama: Bahrain Islamic Bank.
7. Siddiqi, M. N., 1988. Banking without Interest, Leicester: The Islamic

Foundation.

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Comparison between Conventional

Research Report Page 1 of 20

Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc.

Research Report Page 2 of 20

When Conventional Bank advances the loan to consumers for any

Islamic Banks lend money to consumers for the business

Research Report Page 3 of 20

• Islamic financial institutions faced more difficulties in attracting deposits than

• Islamic financial institutions had higher cash/deposit ratios than conventional

• Within the sample studied, there were no significant differences in profitability

• Islamic financial institutions and conventional banks offered their depositors

• Islamic banking deals in asset where as Conventional banks deal in money or

Research Report Page 4 of 20

• Islamic banking actively participates in trade and production through Trade,

Research Report Page 5 of 20

Four rules govern investment behavior in islamic banking:

a. The absence of interest-based (riba) transactions.

b. The avoidance of economic activities involving speculation (gharar).

c. The introduction of an Islamic tax, zakat.

Research Report Page 6 of 20

Furthermore, as the fulfillment or materials needs assures a religious freedom for

Research Report Page 7 of 20

Research Report Page 8 of 20

Research Report Page 9 of 20

Research Report Page 10 of 20

“The banking sector is left with no option but to innovate and

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There are two sorts of financing products:

• Fund Based Facilities:

“Banks Funds involve”

“Banks Funds are not involved”

 Letter of Credit (LC)

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 Application for Finance

Remaining documents required are explained with each type of facility.

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Broadly classified, LC may be bi-furcated as under:

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Bank guarantees may be broadly classified under the following heads:

These are generally requested by customers, guaranteeing completion of work or

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Conventional banks are more competitive because of their experienced in banking

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Irrespective of religious appeal and affiliations, consumers would be eventually attracted

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• Shortage of experts in Islamic banking: The supply of trained or experienced

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3. “Pakistan Institute of Development Economics” retrieved from the World Wide

4. “Muslim Commercial Bank, Pakistan” retrieved from the World

5. Handbook of Islamic Banking, 1977-86. Published in Arabic by the International

7. Siddiqi, M. N., 1988. Banking without Interest, Leicester: The Islamic

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